Pension Funds to More Proactively Manage Assets

According to “Pensions Funds DIY: A Hands-On Future for Asset Owners,” driving this change is the challenge of building a holistic view of risk across a multi-asset portfolio while aggregating risk data from multiple managers, aligning interests and managing costs. “Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance and is leading to a need for more in-house accountability for asset and risk management,” says Martin J. Sullivan, head of Asset Owner sector solutions for North America, State Street. “However, this undertaking requires pension funds to carefully evaluate how to achieve a balance of in-house and external talent, tools and technologies.”

A research survey of 134 pension fund executives conducted in conjunction with the Economist Intelligence Unit (EIU) finds a majority of pension fund respondents (81%) indicate they are exploring bringing more asset management responsibilities in-house over the next three years. This is due in part to cost concerns, with 29% indicating it is a challenge for them to justify the fees of their asset managers.

As part of this shift, a majority of pension funds (53%) are expecting to use more lower-cost strategies to achieve desired investment outcomes, as well as expanding the number of technology platforms and software solutions they employ (43%). More than half (51%) of funds place a high priority on strengthening their governance over the next three years.

Three-quarters of pension funds surveyed will ramp up their risk appetite as the search for returns intensifies in a tough investment climate. The survey results show private equity will be the biggest winner from a surge in alternative investments by pension funds. Emerging market investments are also becoming more important.

“While the largest and most sophisticated funds can handle most aspects of multi-asset class portfolios in-house, the majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” says Sullivan. “This shift underscores pension funds’ need for new, more collaborative partnerships with asset managers who can offer them transparency and effectively tailor investment ideas and solutions to their unique needs.”

On behalf of State Street, the EIU conducted a global survey of institutional asset owners during July and August of 2014, spanning both defined contribution and defined benefit assets. Forty-two percent of respondents were from the Americas, 36% from Europe, Middle East and Africa (EMEA) and 22% from Asia Pacific. Fifty-two percent of respondents came from public sector pension funds, 31% from private sector pension systems and 16% from superannuation funds.